USAID Evaluating Tax Expenditures in Jordan


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Executive Summary

·   The Council of Ministers is empowered by law to grant tax relief from sales tax and custom duty on a discretionary basis

·   There is currently no clear framework in place nor are there clear policies and procedures to periodically evaluate forgone revenue to the government from various tax expenditures

·   Total tax expenditures in Jordan were estimated at 7% of GDP in 2012 with around JD 1.6 billion

·   The inadequate treatment of tax expenditures is a concern for fiscal accountability and transparency thus indicating the need to improve transparency and fiscal accountability in the budget process as it relates to tax expenditures

Key Findings

·   While some positive change has occurred to streamline the complex exemptions scheme in Jordan since the previous study conducted in 2011, other changes have contributed to the upsurge in the level of tax expenditures

·   Tax expenditures in Jordan affect the following tax categories: Personal Income Tax (PIT), Corporate Income Tax (CIT), General Sales Tax (GST) and Special Sales Tax (SST), Custom Duty, and Real Property Tax

·   Total tax expenditures in Jordan are estimated to be at least JD 1,556 million in 2012 (~7% of GDP) representing an increase since 2010

o   The largest single tax expenditure for 2012 are for the single and family deduction allowance (JD 455 million), followed by zero rating of domestic sales tax (JD 263 million)

o   The largest increase in tax expenditures from 2010 to 2012 belongs to zero rating from domestic sales tax mainly due to the proliferation of zero rated items

o   Tax revenue collection in 2012 represents more than double the size of expenditures

o   Increases in tax expenditures from custom duty in 2012 is due to larger volumes of goods exempted from the levy due to zero rates, trade agreements and oil derivatives

o   The most significant reduction in tax expenditure in 2012 involves the expiration of the reduced-rate transfer fee which cost the government JD 150 million in forgone revenue

o   Though smaller in magnitude, tax expenditures from municipal taxes amount to JD 48 million and remain an important quantity relative to municipalities’ budgets which depend on municipal tax revenues to deliver basic services at the local level

 

Personal Income Tax and Corporate Income Tax

The various types of tax expenditures for PIT and CIT identified include:

·   Exclusions from Gross Income

·   Deductions from Gross Income: subtraction of certain amounts from gross income to arrive at adjusted gross income

·   Deductions from Adjusted Gross Income (AGI): subtraction of deductions and exemptions

·   Preferential taxation rates: differentiated corporate income tax rates and unbalanced tax treatment of interest income

·   Credits against tax: subtracting certain credit amounts from initial basic tax liability of taxpayer

·   Investment incentives and free trade zones: investment incentives through exemptions and differentiated tax rates for different industries and activities

 

General Sales Tax and Special Sales Tax

·   GST is essentially a value-added tax (VAT) where a multi-stage and value-added benchmark tax system/structure is defined

·   Tax expenditures from GST and SST mainly originate from exemptions and deductions determined by the General Sales Tax Law, Investment Promotion Law and bodies exempted by the Council of Ministers’ decision. The Development and Free Zones Law provides additional exemptions and zero rating for goods and services purchased or imported

·   The various types of tax expenditures for GST and SST identified include:

o   Reduced tax rate: any GST below 16%

o   Reductions to the tax base resulting from exemptions

 

Custom Duty

Tax expenditures under Custom Duty are driven by:

·   Zero rating whereby a number of products are zero rated

·   Trade agreements

·   Reduced tariffs with eight different sectors benefiting from exemption of custom duties on imported fixed capital for at least the first three years of doing business. Other sectors may be exempted based upon Council of Minister’s recommendation

·   Special agreements including Council of Minister’s decision and Investment Promotion Law with exemptions generally originating from export incentives

 

Real Property Tax

Any deviation away from the 15% tax rate is considered a tax expenditure. Tax expenditures originating from real property taxes include:

·   Exempted properties: special exemptions to the municipal property tax to standard categories

·   Reduced tax rate: vacant land taxed at ~0.04% of assessed rental value while incomplete buildings are subject to vacant land tax

·   Depreciation deduction: 20% depreciation deduction irrespective of the age of the property, except if pre-1974

·   Discount on tax due with empty buildings granted 50% reduction on tax due

·   Real estate market incentives

Recommended Actions/Policies

The study provides recommendations for streamlining tax expenditures in addition to representing a proposal for the integral and systematic evaluation of tax expenditures in Jordan. It also provides recommendations for devising a rules-based mechanism for the granting of tax incentives through the Council of Ministers. Highlights of these recommendations are provided hereafter.

 

Evaluating Tax Expenditures

·   Create a Tax Expenditure data framework and aim at quantifying annually

·   Review impact of programs that use tax expenditure mechanisms

·   Produce an annual tax expenditure study to evaluate proposed changes to the tax law and estimate the impact on tax expenditures, as well as changes on tax expenditures over time

 

Tax Expenditures in the Budget Process

·   Publish annual tax expenditure report as part of the annual budget process and subject to scrutiny

·   Impose thresholds and/or ceilings, particularly for exemptions granted through the Council of Ministers, if this mechanism remains

 

Investment Incentive Scheme

·   Provide clear sunset clauses for grandfathered incentives and for investments operating in the Development Zones

·   Eliminate favoritism with certain sectors of the economy

·   Restructure the cumbersome, multi-layered investment incentive scheme and consolidate into a new scheme that is neutral with respect to the various categories of investment

 

Council of Ministers Decisions

·   Eliminate discretionary power

·   Set a target to be granted in exemptions per year

·   Set policies and procedures (i.e. max allowance per investment; sunset/commencement rules)

·   Assess the success or failure of the incentive program

 

An overview of the recommendations targeted towards the specific tax categories are provided hereafter.

Personal Income Tax

·   Couple rates proposed in the new draft Income Tax Law with further reduction in the exemption allowance to make progressivity effective

·   Increase the withholding rate as final taxon interest income and income from lottery prizes

·   Limit deduction to JD 5,000 for principal taxpayer and JD 10,000 for families

 

Business Taxation

·   Limit exemptions to certain entities, including some income sources of non-profit organizations

·   Eliminate multiplicity of laws providing income tax incentives

·   Set out clear commencement rules for income taxation in Development and Free Zones

·   Introduce a special tax regime for SMEs

·   Ensure that new Investment Law does not violate provisions found in the Income Tax Law

 

General Sales Tax

·   Limit zero rate application to exports

·   Keep only one reduced rate schedule, either 4% or 8%

·   Eliminate items in the exemption list, or move merit items, particularly food items, to the reduced rate schedule of 8%

·   Revoke exemptions to specific sectors through the new Investment Law

·   Constrain preferential rate to a small number of basic necessities considered to be material components of low income household consumption

 

Custom Duty

·   Rationalize list of entities and items on zero rating list

·   Do away with ad hoc decisions on special exemptions by Council of Ministers, or establish a rule-based approach

 

Real Property Tax

·   Increase property tax rate on vacant land

·   Consider moving to capital valuation coupled with a reduction in tax rates

·   Eliminate, or provide homestead exemption forowner occupied housing

·   Lower the transfer tax rate

·   Substitute with capital gains tax eventually, or compensate loss from annual property tax collections

 
 

Report Name

Date

Timeline

USAID Evaluating Tax Expenditures in Jordan

October 2011

Not Relevant

Author

Supporting Donor

USAID

USAID

Sector

Lead Ministry

Fiscal Policy

Not available

Key Topics

Corporate Income Tax – Council of Ministers – Customs Duty – Exemptions – General Sales Tax – Income Tax Laws – Investment Law –Personal Income Tax – Real Property Tax – Tax Expenditures – Zero Rating

 

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